South Africa’s stable outlook unshaken by budget, Moody’s says

South Africa’s new budget confirms the already-cautious assessment by Moody’s Investors Service that underpins its stable outlook for the country’s credit rating, while highlighting key risks.

“What we’ve seen is in line with our expectation of the macro economic performance for this year,” said Aurelien Mali, senior credit officer for Moody’s Sovereign Risk Group. “Where there is a difference is in the much lower projection of the revenue in the future, which indicates a fragility that leads to a higher deficit than anticipated,” he said in an interview in Johannesburg on Thursday.

Moody’s rates South Africa’s long-term foreign debt with a stable outlook at a sub-investment grade Ba2, which it defines as carrying substantial credit risk with speculative characteristics. Africa’s most-industrialized economy has been badly hobbled by crippling power cuts, logistics constraints, crime, corruption and high levels of unemployment.

South African Finance Minister Enoch Godongwana told lawmakers on Wednesday the country’s budget deficit would rise to 4.9% of gross domestic product in the fiscal year through March and narrow to 3.6% by 2026-27. Gross debt is seen peaking at 77.7% of GDP in 2025-26, as opposed to February’s forecast of 73.6%.

Investors reacted positively to the budget news despite the sober assessment, with yields on government debt declining sharply as the rand strengthened against the dollar. The ruling African National Congress faces a tough election next year and Godongwana has been under pressure to take an even-softer line on social support.

Mali said that the forecast for debt to stabilize, and the fact that South Africa’s National Treasury had held the line on spending, were encouraging. But it was important to watch whether the projections are met.

“We know that there are social spending pressures and pressure from the SOE sector that will probably affect the budget,” he said, referring to state-owned enterprises that include the struggling power utility Eskom Holdings SOC Ltd. and Transnet SOC Ltd. “So, the risk of a bigger deterioration than the stabilization of the debt has risen.”